Dec. 3 (Bloomberg) -- Canada’s dollar fell as the prime minister threatened to suspend Parliament to stave off defeat at the hands of a united opposition.

The loonie, as Canada’s dollar is known because of the aquatic bird on the one-dollar coin, has dropped 20 percent in the last six months. Canadian Prime Minister Stephen Harper is scheduled to address the nation at 7 p.m. in Ottawa.

“With political instability, especially in these tough economic times, I think people are going to shy away from investing in Canada for a little bit until things get sorted out,” said Tyson Wright, senior currency trader at Custom House in Victoria, British Columbia. “That’s an undercurrent for the Canadian dollar.”

The Canadian dollar dropped as much as 1.6 percent to C$1.2668 per U.S. dollar, from C$1.2463 yesterday. It traded at C$1.2536 as of 4 p.m. in Toronto. One Canadian dollar buys 79.84 U.S. cents.

Harper may suspend Parliament after the main opposition Liberal Party agreed two days ago to form a coalition with the New Democratic Party that would be backed by the separatist Bloc Quebecois during key votes. The alliance may replace Harper’s Conservative Party government as early as next week.

The coalition proposal requires the backing of the country’s head of state, Governor General Michaelle Jean, who returns to Canada today after cutting short a state visit to central Europe. Should she refuse the request to let the coalition govern, the country would be forced into its fourth election since 2004.

‘Permanent’ Budget Deficit

Finance Minister Jim Flaherty, referring to indications the coalition might spend C$30 billion ($23.9 billion) on the economy, told reporters in Ottawa that such an amount would cause a “permanent” budget deficit.

John McCallum, a lawmaker who runs the Liberal Party’s economic strategy group, said the coalition would offer “substantially less” than the figure Flaherty used, while saying it would be irresponsible to propose a figure before reviewing the government’s finances.

“The political uncertainty is weighing on the Canadian dollar at the moment,” said Steven Butler, director of foreign- exchange trading at Scotia Capital Inc. in Toronto. “C$1.30 may be in the cards again, depending on Friday’s numbers.”

Statistics Canada and the U.S. Labor Department are due to release employment data on Dec. 5. Canadian employers shed 25,000 jobs in November, according to the median forecast of 21 economists surveyed by Bloomberg News.

‘Set to Fade’

“Canada was one of the few G-20 countries to report positive third-quarter growth, but that advantage is set to fade and we expect the Canadian dollar to be a G-10 underperformer,” Bank of America Corp. strategist Robert Sinche wrote in a note. “Jobs data and possible overturn of government lie ahead.” Bank of America predicts the currency will depreciate to C$1.27 by the end of the third quarter in 2009.

The yield on the two-year government bond rose two basis points, or 0.02 percentage point, to 1.61 percent. The price of the 2.75 percent security due in December 2010 fell 5 cents to C$102.24.

The 10-year note’s yield was little changed at 3.16 percent. The price of the 4.25 percent security maturing in June 2018 rose 2 cents to C$108.92.

The 10-year bond yielded 155 basis points more than the two- year security, down from 184 basis points on Nov. 6, when the so- called yield curve was the steepest since May 2004.

Canada’s central bank cut borrowing costs six times in the past 12 months, lowering its overnight rate to 2.25 percent from 4.5 percent. Policy makers next meet on Dec. 9, when they will cut interest rates by 50 basis points to 1.75 percent, according to the median forecast in a separate Bloomberg survey.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net.

Last Updated: December 3, 2008 16:01 EST